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8 2 FINANCE CROWDFUNDING

F ^ B ByKrisSanganilsdomcrywds

The limited choices of finance often mean that technology startups have to pan-handle the men inpinstripes. Could crowdfunding be an alternative source of funding?

FORTY YEARS AGO, the only place toobtain financing for a new startup idea forthe vast majority of businesses, includingtechnology ventures, was the bank.

If you charmed the bank manager,he (as would invariably would be thecase) may grant you an overdraftfacility but this could be taken away atthe whim of head office bank-lendingpolicy. Clearly, this was far from ideal.

Then came the 1980s and financialderegulation, which encouraged a great|eal of interest in alternative investments.Thus there was a growth in ventureapitalists and angel investors searching for

echnology businesses.

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Investing in risky technologyprojects became popular and grewmassively until the dot-com bubbleburst at the turn of the millennium.

In the current austere times, techentrepreneurs have had a tougher runof raising finances than the previousdecade - when even absurd propositionsattracted millions of dollars and pounds.Now, however, startups have the optionof asking complete strangers for cash-a strategy known as crowdfunding.

Crowdfunding was originally conceivedas a way to fund mostly unprofitablecreative projects such as films, musicand books. US websites have used this

method to I'aise millions of dollars tofund a variety of creative ventures.

In the UK, money for new businesses istight - Bank of England figures point tolending that has shrunk steadily since thebeginning of the banking crisis in 2008.

Today there are hundreds ofcrowdfunding platforms around the world,with fundraising reaching billions ofdollars annually In 2012, crowdfundingplatforms raised $2.7bn and successfullyfunded more than a million campaigns.

Crowdfunding research organisationMassolution claims that the techniqueraised $5.1bn last year alone. "In thepast it wg

83Tile was fundedthrough acrowdfundingplatform onits developers'own website

for ordinary investors to get in on theground floor investing in companiessuch as Google, Facebook or Twitter,"says Kevin Berg Kartaszewics-GreU,research director for Massolution.

US sites Kickstarter and Indiegogo arethe largest in the crowdfunding genre. Onthese crowdfunding platforms, donationsare sought in return for special rewardssuch as a free product or even a chance to beinvolved in designing the product or service.

The most well-known example of thisis Pebble Technology, which launched aKickstarter campaign in April 2012 withan initial fundraising target of $100,000.Backers pledging $115 were promised aPebble smartwatch when they becameavailable - in effect, they were preordering aproduct that did not yet exist for a discount.

Within six days, the project had met its$100,000 goal and within the first month ithad become the most funded project in thehistory of Kickstarter, raising over $4.7m. Bymid-May, funding closed with $10m pledgedby almost 70,000 investors.

Do-it-yourself crowdfundingIt is also possible to set up a crowdfundingplatform on your own website usingopen-source crowdfunding platformsoftware such as Selfstarter.

This is what software and hardwareengineers Mike Farley and Nick Evans didwhen they started a new campaign. Theyused the software on their own website fortheir product Tile - a matchbook-sized,Bluetooth, low-energy device that aims touse peer-to-peer networking linked to socialmedia to recover lost items to which it isconnected. The Tile pre-order campaign ranfrom summer 2013 and reached its targetof $20,000 before the end of that year.

"We decided to use our owncrowdfunding platform so that we couldmake the decision to go ahead and notrely on third-party rules," says Evans,chief executive of the company

For the Pebble and Tile examples,none of the investors were promisedequity, as financial regulation is verystrict on selling shares in your companyoutside the remit of the Securities andExchange Commission (SEC). However,this may soon be a possibility.

Two years ago, the US passed theJumpstart Our Business Startups Act (Jobs)with the aim of allowing the general publicto receive company equity in exchange forfunding. But, even for Americans, equitycrowdfunding comes with limits and caveats.The new law only permits investments of upto 5 per cent for individuals with an annualincome of less than $100,000, and up to 10 percent for those who make over $100,000.

Although the law was passed almost twoyears ago, the Securities and ExchangeCommission has stiU to set up the regulatoryframework for equities crowdfunding. But atleast they will have a framework in place inthe near future. The UK, on the other hand,has not enacted any similar legislation.

The regulatory future is uncertain in theUK, which focuses on protecting investors

from 'unsuitable' investments. The generalrule is that for funds to be offered to thepublic the funds themselves have to beauthorised, as do those who manage them.Unregulated funds can be offered, but onlyto specific classes of investor - which wouldexclude your average consumer backer.

The inherent vagueness of UK regulationis leading some within the industry to lobbyfor a similar law to that in the US forcrowdfunding platforms to be applied.

Regulating your campaignWith the current model of crowdfundingfor technology companies, there area number of pitfalls to circumvent.The obvious is the stigma attached ifyour crowdfunding campaign fails.

The main crowdfunding platforms havestrict rules and time limits on campaigns.For example, on Kickstarter you would haveto raise your target by a given date and if youfail to do so, no funds would be released.

You could end up losing money if you donot do sufficient research and development,however. Producing a prototype consumer

'In the past it was impossiblefor ordinary investors to get inon the ground floor investingin companies such as Google,Facebook or Twitter'product, for example, is the first step.You need to consider the economics ofmass-producing the product at the pricethat you state - it could end up costing a lotmore once you have retooled the productand taken manufacturing into account.

Additionally, consumer law needs to betaken into account. Developed economiestend to have well-tested legislation to protectconsumers from entering into unfairconsumer contracts.

W WEBLINKFind out more online...www.zopa.comwww.ratesetter.comwww.crowdcube.comwww.fundingcjrcle.comwww.seedrs.com

"I have seen people who haven't beenable to manufacture at the price theythought they would be able to and they havedropped off the face off the earth," saysSalvador Briggman, a blogger and expert oncrowdfunding whose site www.crowdcrux.com reports on the global crowdfundingindustry "It's really crucial to concentrateon the preparation phase - particularly ifyou are a first time engineer who doesn'thave experience in manufacturing."

There is a strong argument to be made thatangel investors and even the high-street bankmanagers can offer more than just money;they could also provide entrepreneurs withadvice. Tech enterprises could miss out onsuch mentorship by ignoring traditionalinvestors and turning to crowdfunding.

Starting up a company is a very riskyand challenging journey Besides findingsufficient funding, there are alwaysadditional expenses that are impossibleto forecast as well as challenges inmarket validation and people whowant a piece of your venture in returnfor helping to get it off the ground.

However, having said that, crowdfundingprovides a welcome strategy when the mainbanks are unwilling to invest. A successfulcrowdfunding campaign creates a base ofcustomers who have a vested interest in thesuccess of your business. It also allows anentrepreneur to gain market validation andavoid giving up equity before going all outand taking a product concept to market.

Crowdfunding can be good for publicityMany platforms incorporate social mediamechanisms, making it painless to getreferral traffic and greater sales. This cannothave been lost on the founders of Pebble.

The past year has seen tremendous growthof interest and funds available from thedifferent types of crowdfunding platforms.It's the adorable baby of the finance world.What wiU it grow up to be? *

WHERE TO GET CROWDFUNDINGYou might think that theidea of crowdfunding is arecent phenomenon fromthe US, but UK companieshave pioneered this model.* UK peer-to-peer lendingsite Zopa pioneered thepeer-to-peer crowdfundinglending model a decadeago. To date it has lentmore than 467m toindividuals with morethan a quarter loaned inthe past year, boastingan average return toinvestors of 5 per cent.* Ratesetter launchedin 2010 and has alreadymanaged to persuadeinvestors and savers topart with more than morethan 100m worth ofloans to borrowers.The

company also operates aprovision fund that kicks inif a borrower defaults, andthe company claims thatevery lender has receivedevery penny of capital andinterest expected.* Funding Circle was setup specifically to offerloans to the UK's small- andmedium-sized enterprisesthat were being starved ofcash injections.To date, ithas funded 215m worthof business loans - and hasrecently started operatingin the US.* Crowdcube was thefirst platform in the worldto target investors whowanted to take equitystakes.To date it hasinvested in 95 businesses

and has raised fundingof more than 18m forthese companies since itslaunch in 2010. It currentlyhas 59,000 investors.Thebusiness is already fullyregulated by the FinancialConduct Authority.* Seedrs j oined Crowdcubein the equity-basedcrowdfunding space in2012 and, to date, hasraised 5.5m for companiesusing the site. UnlikeCrowdcube, however, itfocuses exclusively onstart-up companies andtherefore has helpeda higher proportion ofcompanies that tend tobe technology focused.It has recently expandedinto continental Europe.

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